Fed Hike Expectations Rise as US-Iran Talks Loom
US Federal Reserve Chair Jerome Powell is considering reducing the number of Federal Open Market Committee (FOMC) meetings from eight per year, a practice in place since the Volcker era in 1981. This potential change could compress policy transparency and limit market access to guidance windows.
The CME FedWatch data shows that the probability of holding rates steady through September has fallen to 26.4%, while the cumulative probability of a 25bp hike has risen to 73.6%. Through October, the cumulative 25bp hike probability stands at 62.1% and a 50bp hike at 17.9%.
Markets are digesting Powell's earlier firm reaffirmation of the 2% inflation target and his downplaying of forward guidance. A reduction in meeting frequency would further lower transparency, providing short-term support for the dollar and pressure on risk-asset valuations.
US-Iran talks are scheduled to begin tomorrow afternoon (Tuesday morning Beijing time), with President Trump stating that an agreement on the Strait of Hormuz already exists and a deal on denuclearization is also expected. The rapid compression of the crude risk premium has eased near-term inflation concerns, with WTI falling nearly 5%.
The US coordinated with Japan last Friday to intervene in the yen market in response to disorderly moves. Treasury Secretary Bessent emphasized that the US-Japan alliance is built on both economic and national security.